Espiner on Solid Energy

Colin Espiner writes:

I admit I’m no expert, but it looks to me as if taxpayers lose either way under our current SOE model. We either pay through the nose for our power with little or no government regulation on price or we watch poorly performing SOEs bailed out with our money.

I know the sale of SOEs has always been a political hot potato, but let’s look at it rationally rather than emotionally. Why does the public need to own a coal mine? Or a power company? Or an airline? 

Here’s my suggestion: Sell the lot, but only after decent regulation to protect the consumer has been put in place. Here in New Zealand we pay high prices for monopoly services that are effectively government-owned. 

Former energy minister Gerry Brownlee talked tough a few years back about taking on the power companies, but of course nothing came of it. According to a study by Victoria University researcher Geoff Bertram we have some of the highest power prices in the OCED. Is it any wonder, when the government is both poacher and gamekeeper?

There’s no reason I can see why taxpayers should be exposed to risks taken by wannabe venture capitalists or price-gouged by our own companies. Selling them off is the only way to create a level playing field and provide any real competition for the poor old consumer. 

I basically agree. The correct role of Government is regulation, not ownership. When they are both and owner and a regulator, you get a conflict of interest and neither are done as well as they can be.

If people think ownership doesn’t matter, look at Solid Energy. The “collapse” has happened because they had a very ambitious expansion programme led by the then CEO.

Now I’d argue that the basic strategy of expanding away from just coal mining was not a bad one for Solid Energy. With the difficulty of getting a coal mine consented, the new safety focus post Pike, and a target of more renewable energy – the company didn’t have much of a future just as a coal miner.

However where it appears the company went wrong was the scale of the expansion plans were too ambitious, they required too much debt and risk, and not enough focus remained on the core business of coal. Hence projections were done on coal prices that were too high. Now globally all companies have been caught out by the 40% slump in coal prices including giants like BHP.

However Solid Energy has been more exposed, because they had taken on higher risk with more ambitious expansion plans. And this is where ownership does matter.

If the Directors themselves have shares in the company, and they represent shareholders whose actual money is at risk, then they will be more cautious about expansion plans. That is not to say they would not agree to them, but they would probably have been saying let’s do it slower, let’s keep our core focus on our current income stream and not borrow too much on this vision of huge expansion into lignite and other areas.

When it is your money at risk, not someone else’s money, you act differently. The price of failure is catastrophic when it is your own money.

I have absolutely no doubt that if Solid Energy was not state owned, it would not be in as dire a situation as it is now.

That is not to be an absolutist and say that all private sector companies succeed and all state companies fail. That would be ridiculous and obviously not true. But overall there is a reason the private sector does better – it is because you make better decisions when it is your own money at risk.

Going back to Colin’s column, I agree we should sell pretty much all our commercial companies, and not just 49% of them. Taxpayers should not be having to bail out mining companies or risking the expansion plans of the power companies. The best thing the Government can do is be an impartial pro-consumer regulator that ensures we have excellent competition. That is not compatible with ownership